AP Micro Unit 2: Supply and Demand

capital goods

Goods made for indirect consumption. Goods that make consumer goods

human capital

the knowledge and skills a worker gains through education and experience

the law of demand

consumers buy more of a good when its price decreases and less when its price increases, inverse relationship between price and quantity demanded

quantity demanded

price changes ________ ________, not demand

demand shifters

income, population, price of substitutes, price of complements, expectations, tastes

substitutes

two goods for which an increase in the price of one leads to an increase in the demand for the other

complements

two goods that are bought and used together, price of one goes up then demand for other goes down

normal goods

Goods for which demand goes up when income is higher and for which demand goes down when income is lower.

inferior goods

Goods for which demand tends to fall when income rises.

right

demand curve increase shifts _______-

substitution effect

an increase in price makes substitutes more attraction an a decrease in price makes them less attractive

income effect

an increase in price decreases purchasing power and visa versa (if smthg is more expensive, i can't afford it as much)

the law of supply

producers sell more of a good at higher prices and less as its price falls

supply shifters

input prices, government tools, number of sellers, technology, prices of other goods, producer expectations

government tools

per unit taxes, subsidies, regulations

decrease supply

per unit tax

increase supply

subisidies

generally decrease supply

regulations

increase

An increase in the number of sellers in a market generally leads to a _______ in market supply,

increase

an increase in technology also _______ supply

supply curve

upward sloping, positive linear function :)

elasticity

a measure of the responsiveness of quantity demanded or quantity supplied to a change in price

elastic

refers to a market for a product or service that is price sensitive; relatively small changes in price will generate fairly large changes in the quantity demanded

inelastic

describes demand that is not very sensitive to price changes

total revenue

Price x Quantity, the total amount of money a firm receives by selling goods or services

elastic

decrease price, increase total revenue or increase price, decrease TR (moving opposite ways)

inelastic

decrease price, decrease total revenue or increase both

total revenue test

A test to determine elasticity of demand between any two prices: Demand is elastic if total revenue moves in the opposite direction from price; it is inelastic when it moves in the same direction as price; and it is of unitary elasticity when it does not change when price changes.

unit elastic

no change in price

marginal revenue

the change in total revenue from an additional unit sold

percent change

(new-old)/old x 100

elasticity coefficient

% change in quantity / % change in price

relatively elastic

If the absolute value of the elasticity coefficient is greater than 1 then it is

unit elastic

If the absolute value of the elasticity coefficient is equal to 1 then it is

relatively inelastic

If the absolute value of the elasticity coefficient is less than 1 then it is

income elasticity

% change in quantity demanded / % change in income

normal good

A positive income elasticity coefficient means _______ ______

inferior good

A negative income elasticity coefficient means _______ ______

cross price elasticity

a measure of how much the quantity demanded of one good responds to a change in the price of another good

cross price elasticity

% change in quantity demanded / % change in price of related good

substitutes

positive cross price elasticity

complements

negative cross price elasticity

market equilibrium

Point where supply equals demand.

surplus

When the price is above market equilibrium, a situation in which quantity supplied is greater than quantity demanded

shortage

Price is below equilibrium; A situation in which quantity demanded is greater than quantity supplied

consumer surplus

the difference between the value to the consumer and the price

producer surplus

the amount a seller is paid for a good minus the seller's cost of providing it

economic surplus

consumer surplus + producer surplus

allocative efficiency

when the mix of goods being produced represents the mix that society most desires, when economic surplus is maximized (@ equilibrium)

deadweight loss

the reduction in economic surplus resulting from a market not being in competitive equilibrium

price floor

A government intervention that places a legal minimum on the price at which a good can be sold, (but on the graph it's actually high)

above

a price floor must be _______ the equilibrium to be binding

price ceiling

A legal maximum on the price at which a good can be sold

below

a price ceiling must be _______ the equilibrium to be binding

tax revenue

the money a government gains from the collection of taxes

tax incidence

the actual division of the burden of a tax between buyers and sellers in a market

buyers

If the demand curve is less elastic than the supply curve, than the ________ have a bigger loss on the tax

sellers

If the supply curve is less elastic than the demand curve, than the ________ have a bigger loss on the tax

no tax

If the demand is perfectly elastic, this means there is ___ _____ and all the tax would fall on the buyers

producer

If you add a tariff, then _________ surplus increases

consumer

If you add a tariff, then _________ surplus decreases

0

Coefficient for perfectly inelastic demand

infinity

Coefficient for perfectly elastic demand

entire

A change in demand is when the _______ demand curve shifts.

movement

A change in quantity demanded is __________ along the curve.

double shift rule

If two curves shift at the same time, EITHER price or quantity will be indeterminate